Monetary Policy-Making Around the World: Different Approaches from Different Central Banks February 25, 2004 A Professor’s Guide to Economic Data and Monetary Policy Making Patricia Pollard Research Officer and Economist Federal Reserve Bank of St. Louis The views expressed do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis nor the Federal Reserve System

Basic Data on Central Banks

Number of Central Banks

Instruments Operating Targets Intermediate Targets - Reserve Requirements - Official interest Rates - Open Market Operations - Direct Controls - Short-term Interest Rate - Reserve Aggregates - Monetary Aggregates - Inflation - Exchange Rate Goals - Price stability - Sustainable Growth - High Employment - Financial Stability    Tactics  Strategy Monetary Policy Framework

Institutional Arrangement Goals/Objectives Targets Instruments Policy making Process

Institutional Arrangement Who Determines the Framework? –Government –Central Bank –Interaction Goal versus instrument independence

Goals of Monetary Policy What Can Monetary Policy Achieve? –Price Stability –Employment –Economic Growth

Statutory Objectives of Central Banks (Bank of England Survey of 94 Central Banks) Only non-monetary stability (1%) Monetary stability & other non-conflicting (57%) No statutory goals (3%) Monetary stability & conflicting (13%) Only monetary stability (26%) Source: Mahadeva and Sterne (2000)

Targets of Monetary Policy What Do Central Banks Target? –Inflation Rate –Exchange Rate –Monetary Aggregates Who Sets the Target? –Central Bank –Government –Both

Explicit Targets and Who Sets Them: 1998 Survey of 93 Central Banks Source: Mahadeva and Sterne (2000)

Targets of Monetary Policy Who Sets the Target? –U.S. – No targets set –Euro Area – ECB defines price stability Below but close to 2 percent in medium term –England – Government 2 percent –Canada – Government and Bank of Canada 1 to 3 percent –Japan – Bank of Japan Outstanding balance of current accounts at BOJ –30 to 35 trillion yen

Targets of Monetary Policy Changes in Targets in 1990s –Increase in use of targets In percent had an explicit target In percent had an explicit target –Increased popularity of inflation target 1990 –5 countries set an inflation target –1 country relied solely on an inflation target 1998 – 54 countries set an inflation target –11 countries relied solely on an inflation target

Explicit Targets: 1990 and 1998 Source: Mahadeva and Sterne (2000) 1990 (84 central banks) 1998 (93 central banks)

Explicit Targets: 1998 and

Instruments of Monetary Policy Direct Controls –Set or limit prices (interest rates) –Set or limit quantities (amount of credit outstanding) Indirect Controls –Adjust the underlying demand and supply of bank reserves

Instruments of Monetary Policy Reserve Requirements –Not used as a policy instrument in most countries –Bank of Canada does not set reserve requirements –Bank of England sets a cash ratio deposit, not for policy purposes. –Federal Reserve, ECB and BOJ all set reserve requirements

Instruments of Monetary Policy Open Market Operations –Federal Reserve Uses open market operations to meet the target for fed funds rate Once a day Repurchases – overnight to 3 months –European Central Bank Minimum refinancing rate sets lower bound for repurchases Once a week Repurchases – 14 days –Bank of England Repo rate is the rate at which BOE provides liquidity to the interbank market, sets the Sterling Overnight Interbank Average Rate (SONIA) Several times a day Repurchases – 14 days

Instruments of Monetary Policy Open Market Operations –Bank of Japan Uses open market operations to meet target for the outstanding balance of current accounts held at the Bank of Japan Two to three times a day Repurchases and outright purchases Repos range from 7 days to 6 months –Bank of Canada Uses open market operations to keep the target for overnight rate within a 50 basis point band Once a day if rate is straying from the target Repurchases – overnight

Instruments of Monetary Policy Standing Facilities –Facilities that allow financial institutions to borrow directly from the central bank Provide upper bound for official interest rate target –May allow for lending to the central bank Provide lower bound for official interest rate target –Activated on demand by market participants –Typically overnight loans only

Instruments of Monetary Policy Standing Facilities: Central Bank Lending –Federal Reserve Primary Discount Rate –Penalty rate, set at 100 basis points above fed funds rate target –European Central Bank Marginal Lending Rate –Penalty rate, since April 1999 has been set at 100 basis points above the main refinancing minimum bid rate –Bank of England No typical lending rate Late overnight repo facility, penalty rate set at 100 basis points above the repo rate

Instruments of Monetary Policy Standing Facilities: Central Bank Lending –Bank of Japan Basic Loan Rate (Discount Rate) –Penalty rate, with additional penalties for frequent borrowers –Bank of Canada Bank Rate –Penalty rate, set at 25 basis points above the target for the overnight rate

Instruments of Monetary Policy Standing Facilities: Central Bank Deposits –Federal Reserve No interest on deposits at the Federal Reserve –European Central Bank Deposit Rate –Since April 1999 has been set at 100 basis points below the main refinancing minimum bid rate –Bank of England No interest on deposits at the Bank of England –Bank of Japan No interest on deposits –Bank of Canada Deposit rate set at 25 basis point below the target for the overnight rate

ECB Key Interest Rates January 1, 1999 – February 23, 2004 Percent Deposit Rate Marginal Lending Rate Refinancing Rate

Bank of Canada Key Interest Rates January 1, 1999 – February 23, 2004 Percent Deposit Rate Bank Rate Overnight Rate Target

Federal Reserve Key Interest Rates January 1, 1999 – February 20, 2004 Percent Discount Rate Fed funds target

ECB Key Interest Rates January 1, 1999 – February 23, 2004 Percent Deposit Rate Marginal Lending Rate Refinancing Rate EONIA

Bank of Canada Key Interest Rates January 1, 1999 – February 23, 2004 Percent Deposit Rate Bank Rate Overnight Rate Target Overnight Repo rate

Federal Reserve Key Interest Rates January 1, 1999 – February 20, 2004 Percent Discount Rate Fed funds target Fed funds rate

Monetary Policy Process Who Makes the Policy Decisions? –Individual (9) –Committee (79) Consensus (43) Formal Vote (36) –Individual votes published (6) »Japan, Korea, Poland, Sweden, United Kingdom, United States

Monetary Policy Process Who Makes the Policy Decisions? –Number of People on Policy Board/Committee Most common is between 5 and 10 members FOMC members (19 participants) ECB members Bank of England -- 9 members BOJ -- 9 members Bank of Canada -- 6 members Members of Policy Board

Monetary Policy Process How Frequent Are the Policy Meetings? –40 percent meet monthly –34 percent meet weekly –FOMC – 8 times a year –ECB -- Monthly –Bank of England -- Monthly –BOJ – 15 times a year? –Bank of Canada – 8 times a year Frequency of Policy Board Meetings Frequency# of CBs Less than quarterly1 Quarterly4 More than quarterly2 Monthly36 Fortnightly8 Weekly30 Twice per week4 Daily4 Source: Mahadeva and Sterne(2000)

Monetary Policy Process How Frequent Is the Main Instrument Changed? –Much variation in the frequency with which the main policy instrument is changed. –Average changes per year FOMC – 3.8 ECB – 3.0 Bank of England Bank of Canada – 4.6 Number of changes per year

Number of Changes in Main Policy Instrument YearFOMCECBBOCBOE Total Monetary Policy Process

Changes in the Main Policy Instrument FOMC – Federal Funds Rate Target Source: Federal Reserve Board

Changes in the Main Policy Instrument Bank of England – Repo Rate Source: Bank of England

Changes in the Main Policy Instrument Bank of Canada – Bank Rate Source: Bank of Canada

Changes in the Main Policy Instrument European Central Bank – Main Refinancing Rate Source: Eurostat

Monetary Policy Process Transparency –Are changes in policy announced? –Is the vote published? –Are minutes of the policy meeting released?

Monetary Policy Process Indicators of Transparency FOMCECBBOCBOE AnnouncementImmediately Vote PublishedImmediatelyNo*NoWith minutes Minutes Released Thursday after next scheduled meeting No Two weeks after meeting No vote is taken.

Want to Learn More? Central Bank Websites –Bank of Canada –Bank of England –Bank of Japan –European Central Bank –Federal Reserve System (Board of Governors) –Links to the website of most central banks can be found on the website of the Bank for International Settlements

Want to Learn More? Books and Articles –Alexander, William E., Tomas J.T. Balino, and Charles Enoch, “The Adoption of Indirect Instruments of Monetary Policy, IMF Occasional Paper No –Bank for International Settlements, “Comparing Monetary Policy Operating Procedures Across the United States, Japan and the Euro Area,” BIS Papers No. 9, December –Mahadeva, Lavan and Gabriel Sterne, editors. Monetary Policy Frameworks in a Global Context. Routledge Publishers: New York, ( ct.htm –Paulin, Graydon, “The Changing Face of Central Banking in the 1990s,” Bank of Canada Review, Summer 2001.

Want to Learn More? Books and Articles –Pollard, Patricia S. “A Look Inside Two Central Banks: The European Central Bank and the Federal Reserve.” Federal Reserve Bank of St. Louis Review. January/February (research.stlouisfed.org/publications/review/03/01/Pollard.pdf) –“Central Banking in Other Industrialized Countries, Federal Reserve Bank of Boston, New England Economic Review, Second Quarter (